Exam 13: Mechanisms of International Adjustment

The monetary approach to balance-of-payments adjustments suggests that all payments deficits are the result of:

Suppose the United States levies an interest equalization tax,which taxes Americans on dividend and interest income from foreign securities.Such a tax would be intended to:

Figure 13.2.Australian Economy Under a Fixed Exchange Rate System -Refer to Figure 13.2.Starting at equilibrium income $50 billion,where (S-I)0 intersects (X-M)0,suppose that dwindling thriftiness leads to an autonomous decrease in Australian saving to $5 billion.Australian income thus ____ which leads to Australia's trade account moving to a ____.

Under the price-adjustment mechanism,a government's efforts to maintain a current-account surplus is self defeating over the long run because a nation's current account automatically moves toward equilibrium.

If the marginal propensity to save equals 0.1 and the marginal propensity to import equals 0.3,an autonomous increase in exports of $1,000 would expand domestic income by $2,500 which leads to an increase in imports of $750.

Figure 13.2.Australian Economy Under a Fixed Exchange Rate System -Refer to Figure 13.2.The slope of the (X-M) schedule and (S-I) schedule indicates that Australia's foreign trade multiplier is:

Under the price-adjustment mechanism,trade-deficit nations realize price inflation and a loss of competitiveness while trade surplus nations realize price deflation and an improvement in competitiveness.

According to the Keynesian income-adjustment mechanism,income differentials among nations guarantee current-account equilibrium in a world of fixed exchange rates.

Figure 13.3.U.S.Capital and Financial Account Under a Fixed Exchange Rate System -Refer to Figure 13.3.If the political and economic stability of foreign countries worsens relative to that of the United States,the U.S.capital and financial account schedule would shift downward from CA0 to CA1,resulting in net financial outflows from the United States.

The classical gold standard

During the gold standard era,central bankers agreed to react positively to international gold flows so as to reinforce the automatic adjustment mechanism.Which of the following best represents the above statement?

Assume that Canada initially faces payments equilibrium in its merchandise trade account as well as in its capital and financial account.Now suppose that Canadian interest rates increase to levels higher than those abroad.For Canada,this tends to promote:

What is the foreign repercussion effect?

Assume identical interest rates on comparable securities in the United States and foreign countries.Suppose investors anticipate that in the future the U.S.dollar will depreciate against foreign currencies.Investment funds would tend to:

J.M.Keynes suggested that a trade deficit nation

Figure 13.2.Australian Economy Under a Fixed Exchange Rate System -Refer to Figure 13.2.Starting at equilibrium income $50 billion,where (S-I)0 intersects (X-M)0,suppose that improving economic conditions abroad lead to an autonomous increase in Australian exports of $5 billion.Australian income thus ____ which leads to Australia's trade account moving to a ____.

Figure 13.4.Canadian Economy Under a Fixed Exchange Rate System -Refer to Figure 13.4.Starting at equilibrium income $100 billion,where (S - I)0 intersects (X - M)0,an autonomous increase in Canadian investment of $10 billion leads to a $20 billion increase in income and no change in the country's trade account.

Exhibit 13.1 Assume the marginal propensity to consume for U.S.households equals 0.9,and the marginal propensity to import for the United States equals 0.1.Suppose there occurs an increase in investment of $10 billion at each level of income. -Refer to Exhibit 13.1.The change in the level of U.S.imports resulting from the rise in U.S.income equals:

Figure 13.2.Australian Economy Under a Fixed Exchange Rate System -Refer to Figure 13.2.Starting at equilibrium income $50 billion,where (S-I)0 intersects (X-M)0,suppose that changing preferences lead to an autonomous increase in Australian imports of $5 billion.Australian income thus ____ which leads to Australia's trade account moving to a ____.

Reliance on an automatic adjustment process tends to be unacceptable in trade-deficit nations since it requires them to accept price deflation and/or falling income as a cost of reducing imports.